23 January 2013

Zimbabwe: ZSE Not for the Faint-Hearted

Hope should not be lost after all for the equities market as it has assumed a new behaviour pattern in the New Year - going upwards.

Having witnessed mixed fortunes in 2012 with the industrial index having gained by only 4,48 percent whilst the mining index sank by 35,33 percent, equity market investors have found themselves murmuring a word that they last spoke about during the Zimbabwe era - Bull-Run. The challenges for 2012 included a highly uncertain investment environment owing to the implementation of the indigenisation regulations, the constitution making exercise and the prospects of elections. These were compounded by the liquidity crunch in the country that saw turnover on the bourse declining by 6 percent to US$448 million.

With the US$3,8 billion National Budget for 2013 announced on November 15, 2012 showing limited capacity in terms of availing the much-needed funding for capitalisation and modernisation of plant and equipment due to continued lack of fiscal space coupled with low economic growth figures for 2013, many pundits had written-off the possibility of a better performance for equities in 2013. With exports remaining concentrated in low value primary commodities compared to an ever rising import bill, the liquidity situation was seen as remaining tight due to the resultant continued unsatisfactory balance of payments situation.

Given that portfolio investments tend to be shy of political hotspots, the possibility of volatile elections in 2013 was also given as the reason for pessimistic opinions on the outlook for the equities market.

Despite these drawbacks, the equities market has began the year with bulls galloping. As of the 22nd of January 2013 the ZSE had recorded the best ever gains during the first fifteen trading days of the year when compared to similar periods in previous years since the adoption of the multiple currency in 2009.

The mining index has gone up 18,8 percent and the industrial index has moved 9,2 percent since the beginning of the year. During the same period in 2010 and 2011 the industrial index managed gains below five percent whilst the mining index recorded a gain of 2,5 percent in 2010 and a gain of 11,2 percent in 2011. In 2012 both indices fell below the 2011 year-end levels after fifteen trading sessions.

The question now would be asked what has changed in 2013 to spark the Bull Run? Whilst the market has a tendency to move irrationally in certain circumstances, there are few reasons that may explain the rally so far.

Firstly, the political environment has remained stable despite the talk of elections. This may be a result of the efforts by the Government of National Unity to ensure a peaceful environment in the country. Whilst some local investors are waiting on the fence, foreign investors are seeing value in the local bourse as the evidenced by the increase in their purchases. For instance, in 2010 foreign investors contributed 38 percent of all the purchases on the ZSE, a figure which rose to 40 percent in 2011 and 47 percent in 2012. This is definitely an upward trajectory.

Secondly, given that many investors had become overweight in fixed income assets against a low inflation rate of around three percent, it is clear that the pressure by the authorities on banks to reduce their lending rates will increase. As a result, investors are positioning themselves against the negative effects of a possible continued fall in returns on the money market by diversifying their assets into equities.

Yes, the economic environment and some indicators are not all that rosy now but compared to 2009, the business and investment environment has greatly improved. If we use bank deposits as a rough measure of liquidity in the economy, we were at US$380 million in February 2009 when the multiple currency system started.

Latest figures from the Central Bank show that total bank deposits stood at US$3,8 billion in November 2012, representing 1184 percentgrowth over the three year period. This is no mean fit in a dollarised environment.

Thirdly, the market has also been relatively underpriced given the challenging operating environment and counters such as Econet are simply experiencing a correction in their valuations. The first quarter is also active with corporate earnings reports and most investors indicate their expectations on company performance through buying or selling.

The current rally has been spearheaded by the heavyweights on the market whose earnings normally excite investors and it is therefore possible prices have been moving in anticipation of positive earnings in some counters.

Going forward we expect the market to remain firm during the first quarter. Earnings for the period October to December are expected to come through beginning next month and this should sustain bids on defensive counters. It should, however, be noted that equity investments are long-term assets and therefore not for the faint-hearted seeking quick returns.

Meanwhile, banking stocks have lagged behind in the current rally as negotiations continue on whether there should be free banking for depositors of US$800 or below. The pressure on interest rates to come down has met little resistance from the banking sector but the scrapping of bank charges has raised fears that the viability of the sector will become compromised. This is because the bulk of individual banking clients earn less or around US$800 and banks would lose a significant portion of their income if they were to absolve such deposits from charges. We expect a compromise to be reached that will ensure the viability of the sector is safeguarded but at the same time making banking products more affordable to the mass market.

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